In the world of finance, “rate of return” simply refers to the speed at which money you laid for an investment comes back to you. “Internal rate of return” (IRR) is a somewhat complex calculation or formula used to arrive at a simple rate of return for business opportunities where the rate of return is hidden because certain information is missing, or the problem is otherwise too complex to calculate in a traditional way. To get at a solution finance professionals use, an IRR financial calculator to solve the problem.
Your IRR Financial Calculator Template Finds the Net Present Value
In math terms, the internal rate of return is the discount rate that makes the Net Present Value (NPV) of all cash flows from some kind of investment equal to zero. It may be easier if you think of the IRR as some information that remains hidden until revealed through a problem solving process. The IRR is very handy for comparing two or more investment alternatives.
Solving the problem requires other information including Future Value (FV), and all cash inflows and outflows. These cash outflows may include your cost of capital, and might be expressed as an interest rate. What your template will do is take all your cash flows (positive and negative) and bring them to the present when you input all the data you know and let you arrive at the net present value or IRR.
To begin, enter your cash flow data (both in and out) into a vertical column of individual cells. Label each cell for the year or other time interval they represent. Next, select the rage of cells in the column of cash flow values needed to include in the calculation to arrive at the IRR. Do not include your initial investment with the other cash outflows when you use the financial calculator because it is never discounted along with the other data.
The formula for calculating the IRR already resides in this spreadsheet template, therefore your IRR calculation will be revealed instantly when all your cash flow items have been input.
Download: IRR Financial Calculator